Home Buying Basics: Rent vs buy
The decision to rent or buy comes with lots of variables - payment differences, tax benefits, upfront costs (down payments), ownership costs (maintenance and upkeep) - that make the decision less straightforward than it seems. Let’s tackle the decision using SmartAsset.com’s Rent vs Buy calculator.
Part One: The Debate
For many, renting makes more sense than buying. In many parts of the country, home prices are appreciating faster than buyers can save and the younger generation is not settling down until later in life. Houses are also costly to maintain, property taxes rise over time, and of course home values fluctuate.
On the flip side, owning a home is an opportunity to build long term wealth and provide stable housing for your family. The key is understanding when is the right time to buy.
Part Two: The Decision
This is where a rent vs buy calculator comes in handy. Assuming you’re mentally prepared for home ownership and have an adequate down payment and emergency fund, a rent vs buy calculator uses some basic assumptions - such as your current rent, expected housing payment, down payment amount, and how long you plan to live in the home - to tell you how long you need to live in the house for it to become cheaper to own a home vs renting.
Note: These calculators make basic assumptions about average rent increases, home appreciation, property taxes, and investment earned on what would have been your downpayment (assuming you invested that money in the stock market instead of into your home’s equity). The mechanics of this is beyond the scope of this guide.
We prefer SmartAsset’s rent vs buy calculator, as it is easy to use and understand. In the above example, the calculator uses your city, income and current rent to estimate your affordability and for how long you need to live in the home to ‘break-even’ (i.e. reach the point where buying becomes cheaper).
You can adjust the target home price, your down payment amount, and more details to dial it in. Effectively, what this calculator does is take the cost of renting annually, adjusting for an annual increase in rent, and compare it to the cost of housing, inclusive of mortgage payment, insurance, etc and also include the benefits of home ownership (price appreciation and tax benefits).
Of course, these are basic assumptions, and should not be followed as exact science. These tools help you understand if it at all makes sense to entertain buying a home. Generally, people live in a home for an average of 5-7 years, and the fewer years it takes you to ‘break-even’, the more it makes sense to buy.